Is there currently a wave of insolvencies in Germany?

Professor Müller, are we currently experiencing a wave of insolvencies in Germany?

Steffen Müller: We are currently experiencing a noticeable increase in insolvencies, but I wouldn't call it a wave of insolvencies yet. The number of insolvent partnerships and corporations in the first half of the year is around a third higher than in 2023 and around a quarter higher than in the years before the pandemic. However, it must also be said that the insolvency figures were significantly higher 20 years ago. So we cannot speak of a wave of insolvencies at the moment.

And yet it currently seems as if the topic of insolvencies is more prominent on the agenda.

Yes. On the one hand, this is certainly due to the fact that there have been some major insolvencies of well-known companies with which end consumers were also in contact. Think of the tour operator FTI, the fashion retailer Esprit, the Weltbild publishing house and the company Jokers. Many people are also familiar with the biggest insolvency case in the past, Galeria Kaufhof, which went bankrupt several times and has now been rescued again. The increase in major insolvencies is not just ‘felt’. In the first half of the year, around 100,000 employees in partnerships and corporations were affected - a high number that almost equalled the figures for the record year 2009 after the financial crisis. Back then, the figure was extremely high: 250,000 employees were affected in the year as a whole.

Let's take a look ahead: What further developments do you expect?

Let's take a look at the course of time: In autumn 2021, we still had a historic low in corporate insolvencies. Since then, insolvencies have been rising again - with a few interruptions. The increase was particularly strong in the spring of this year. The highest figure was recorded in April, when the number of insolvent partnerships and corporations was higher than it had been for almost ten years.

Wait a minute: insolvency figures were lower during the coronavirus pandemic than they are now?

Yes, paradoxically, the insolvency figures actually plummeted during the Covid pandemic, even though countless companies were experiencing economic difficulties. This was also due to the suspension of the obligation to file for insolvency for a few months. However, the main reason for the low figures during the pandemic was government support in the form of grants and loans, especially the short-time working allowance, which kept many companies afloat even though they may have already been struggling before the pandemic. Studies show that the financial aid during the pandemic has mainly gone to weak companies, and these weak companies are of course under particular pressure in the current economic situation. This is a key reason why the insolvency figures are currently very high.

Do these late economic consequences of Covid alone count as causes for the rise now?

No. There are also a number of other factors. Companies are currently struggling with rising costs for wages and energy as well as rising interest rates on loans. Ailing companies in particular are often reliant on loans, and these costs play a major role here. Furthermore, there is currently a structural change in several sectors - for example in the automotive industry - which is affecting many suppliers.

How do you expect these factors to develop?

The economic situation in Germany is difficult. However, the IWH is forecasting growth in the coming months. If the ECB's key interest rates were also lowered, the cost of loans would also fall and indebted companies would have a little more breathing space. It remains to be seen if and when further cuts will be made.

In the event that the situation continues to develop unfavourably: Which sectors are particularly at risk?

Our studies show that young companies in particular are at high risk. This is because the business model is often not yet stable. In terms of sectors, basically the entire breadth of the economy is affected. The construction and property sector seems to be somewhat more affected - but this sector can look back on some very good years.

What are the chances for companies in difficulty that slide into insolvency?

Insolvency usually means the closure of the company. Sometimes companies can be preserved, at least in part, through sale or reorganisation. However, this is usually only possible for larger companies. Large companies often go through lengthy reorganisation and restructuring phases before they become insolvent. Small companies tend to disappear at short notice and without much ado. It can be assumed that less than ten per cent of companies survive insolvency for at least a few years and that larger companies are more likely to do so. For smaller companies, insolvency usually means the end.

That sounds harsh.

Yes, it is often very hard for the entrepreneurs, employees and creditors directly affected. But as an economist, I know that some business models cannot survive on the market. So you have to accept that insolvencies are part of the economy. They happen in particularly bad times and also in good times - or even in a middle phase like now. Ultimately, the exit of unproductive companies and the associated redistribution of valuable economic resources - especially skilled labour - to better companies is crucial for the long-term competitiveness of an economy. Crises can therefore also turn out to be cleansing thunderstorms.

The questions were asked by Wolfgang Sender.